Understanding Viable Debt: A Five-Point Framework

Amidst ongoing discussions about Gabon’s debt levels, financial expert Thierry Biyogo offers a thorough analysis of what constitutes sustainable debt. He outlines five critical factors that can transform debt from a potential burden into a catalyst for economic advancement.

Biyogo aims to clarify the complexities surrounding public debt, often portrayed as an overwhelming burden, particularly the 7,000 billion CFA francs borrowed by Gabon over the past fourteen years. The key question, he poses, is: What makes debt viable? and How can nations strategically manage debt for long-term prosperity?

Debt-to-GDP Ratio: A Key Indicator

The debt-to-GDP ratio, currently around 60% in Gabon, is a crucial metric. This figure indicates that gabon’s total debt is equivalent to 60% of its annual national income.According to CEMAC (Economic and Monetary Community of Central Africa) convergence criteria, this level is considered sustainable, provided that tax revenues are sufficient to cover debt repayment, operational expenses, and future investments. For context, many developed nations, such as Japan and the United States, have significantly higher debt-to-GDP ratios, highlighting that the ratio alone doesn’t dictate economic health. Though, these nations frequently enough have stronger economies and more stable revenue streams.

Diversifying Creditor Relationships

Gabon has increasingly turned to capital markets for borrowing, a shift from relying on multilateral organizations like the World bank and the IMF. While capital markets offer rapid access to funds, typically with shorter maturities (around ten years), multilateral institutions provide loans with attractive concessional rates and longer repayment periods. However, these institutions often impose stricter conditions on how the funds are used. Biyogo suggests that these constraints,while perhaps challenging to national sovereignty,can be beneficial for countries like Gabon.

The loans of multilateral institutions have the advantage of attractive concessional rate and long maturity, but they also impose more strict use constraints. From my personal perspective, this requirement is healthy for countries like ours, even if it sometiems shakes up national sovereignty.

Thierry Biyogo, Financial expert

Currency Considerations: Mitigating Exchange Rate Risk

The choice of currency for borrowing is paramount. Borrowing in the local currency (CFA francs) or a currency with a fixed parity to it (Euro) is strategically advantageous for Gabon, as it minimizes exchange rate risk. Conversely, borrowing in US dollars exposes public finances to market volatility. A strengthening dollar increases the cost of dollar-denominated debt, straining financial resources. A sound debt strategy should prioritize CFA franc or Euro-denominated debt to minimize exposure to dollar fluctuations.

Fixed vs. Variable Interest Rates: predictability is Key

Biyogo advocates for fixed interest rates,despite potentially higher initial costs.Fixed rates offer predictability in repayment obligations, allowing the government to accurately forecast expenses over the loan’s duration. Variable rates, while seemingly cheaper initially, can fluctuate with market conditions, posing a threat to public finances, especially during periods of economic instability. The certainty provided by fixed rates outweighs the potential short-term savings of variable rates.

Debt Viability and Purpose: Investing in the Future

Ultimately,the viability of debt hinges on a nation’s ability to meet its obligations and the strategic use of borrowed funds. A robust taxation system is essential to cover current expenses, debt repayments, and crucial development investments.Debt should finance projects that stimulate sustainable growth, generate future revenues, and enhance the country’s repayment capacity. These include infrastructure projects like roads and hydroelectric dams, as well as investments in education and healthcare. The core principle is to leverage debt for nation-building.

Debt can be healthy provided that it finances structuring projects: road infrastructure, hydroelectric dams, schools, hospitals, etc. Investments that create the conditions for sustainable growth, generate future revenues, and strengthen the country’s reimbursement capacity. It is this logic that we must promote: getting into debt, yes, but to build.

Thierry Biyogo, Financial Expert